OVERVIEW OF DERIVATIVE PRODUCTS
DAY 1: INTEREST RATE AND FOREIGN CURRENCY SWAPS
9:00 – 10:30
Interest Rate Swaps
- Overview of interest rate risk
- Structure of basic swap
- Growth and evolution of the market
- Credit arbitrage: the role of comparative advantage
- The nature and motivations of swap–market participants
10:30 – 10:45 Break
10:45 – 12:30
Applications of Interest Rate Swaps
- Quoting conventions: 6–mo. LIBOR, Prime, CP
- Uses of swaps: hedging, trading, reversals
- Benefits of swaps
- Calculations: cash flows, settlements
- Intermediaries: making a market
12:30 – 1:30 Lunch
1:30 – 3:00
Foreign Currency Swaps
- Overview of the market
- Structure of currency swap:
- sale/repurchase of principal
- interim interest cash flows
- Bid/Offer pricing structure
- Credit/fx arbitrage
3:00 – 3:15 Break
3:15 – 5:00
Applications of Foreign Currency Swaps
- Asset/liability management
- Implicit views on rate structure
- Pricing: relation to forward market
- Arbitraging the yield curve
- Risks of swaps
DAY 2: FINANCIAL FUTURES AND FORWARD RATE AGREEMENTS
9:00 – 10:30
Introduction to Financial Futures/FRAs
- Definition of futures market
- Exchanges and their operations: CME, LIFFE, TFE
- Settlement, margin, positioning, index
- Survey of contracts: Treasuries, Eurodollars, JGB, etc.
- Calculation of tick values
10:30 – 10:45 Break
10:45 – 12:30
Pricing of Futures/FRAs
- Slope of yield curve
- Cash/futures relationship
- Calculation of implied repurchase rate
- Trader's view of futures arbitrage
- Quotation system
12:30 – 1:30 Lunch
1:30 – 3:30
Application of Interest Rate Futures/FRAs
- Interest rate risk profiles
- Structure of a futures hedge
- Controlling basis risk: the equivalence hedge
- Locking or unlocking interest rates
- Speculating: the trader's view
- Taking a position
3:30 – 3:45 Break
3:45 – 5:30
Relation of Futures to FRAs: the value of customization
- Forward Rate Agreements: the OTC futures market
- Bank pricing
- Implied forwards and rollover risk
- Shortening/lengthening maturities
- Custom matching sensitivities
DAY 3: OPTIONS
9:00 – 10:30
Introduction to Options
- Options markets: interest rates, currencies, commodities
- Option theory: buying and selling volatility
- Users of options: participants in the market
- Characteristics of option contracts
10:30 – 10:45 Break
10:45 – 12:30
Strategies of Option Positions
- Outline of option pricing: Black–Scholes
- Mapping the profit profile
- Matching the risk to the price sensitivity
- Synthetics using options
12:30 – 1:30 Lunch
1:30 – 3:30
Applications of Options
- Hedging with options:
- Selecting the contract
- Selecting the strike
- Matrix of pricing trade–offs
- Creating a cap: protective put
- Creating a floor: protective call
- Trading strategies
3:30 – 3:45 Break
3:45 – 5:30
OTC Options: adding value with customization
- The need for customization
- Pricing: relationship to strips of European options
- Amortizing the upfront fee
- Risk analysis
- Combinations: the interest rate collar
Product Comparisons
- Building the matrix of trade–offs